How are you reading into the markets holding out comfortably in the 14,400- 14,500 range considering FII flows are not kicking in and we are faced with quite a dire situation on the Covid front as well as the overall economic growth.
I think the market is differentiating. While the broader market is only down about 6-7%, Bank Nifty has corrected almost 20% from 37,700 odd levels to 34,000 odd. We have also seen some stress in the economy facing stocks in aviation and in multiplexes. IT has been relatively differentiated on the basis of earnings and pharma actually is doing well. The market is differentiating and that is a sign that the near term trigger has to be moderation in Covid cases.
So I think sometimes not doing too much is the best strategy in the portfolio. Invest only if you get some good bargains and stay where there is good earnings support. That would serve you well in tough times like these.
What could be a stock idea for momentum in today’s trading session?
More from a long term and not really from momentum perspective, some good financials which have seen correction will get differentiated. For example, ICICI Bank has come out with a very good set of numbers. Their retail growth was double the industry growth. Their deposit growth was much ahead of the industry numbers and retail assets now account for 67% of the book. In 2015, it was the other way. The corporate book was almost 65-66%. It has one of the highest Covid provisions and is very comfortable on capital and liquidity. All subsidiaries are doing well and the stock is still at about two times adjusted book value.
In pharma, we will probably see good strong earnings. In the API space, we like Divi’s, Neuland Labs and some of the names like Cipla, Dr Reddy’s and also some specialty chemicals names. I would stick with sectors and stocks with strong earnings and pick up bargains where prices have corrected more than what the counter really deserves.
What is your view on the entire power space? JSPL is in final stages to divest their power arm Jindal Power and are in talks with several players including the promoters.They are looking at a valuation of about Rs 8,500-9,000 crore. How are you reading into this move?
We really do not track Jindal Steel from a divestment of power division point but we do track some power stocks. We like
, though not at this price point after the sharp run up but more as a long term pick because we have seen net debt reduction and promoters infusing about Rs 2,600 crore which brought down the overall finance cost. Their EPC business is picking up, the order book is pretty healthy and the Odisha distribution arm has shown some recovery. All moving parts are looking good including the renewable portfolio. We also like city gas distributors which is more secular run and long term.
What is the expectation from the FMCG sector?
There will be some margin pressure, varying from industry to industry. In times like these, if there are more lockdowns, the market tends to take refuge in defensive names. We like Tata Consumer as they are expanding the category. Marico, for example, has had double digit volume growth. Their flagship brand, Saffola, has had five quarters of double digit growth. It was 17% plus last quarter but they are expanding into new categories including oats, breakfast cereals, Chyavanprash. Snacking is currently is a small part of the overall pie but would eventually go up.
Even the Parachute seems to have recovered. Tata Consumer’s beverage, salt as well as the Sampann divisions are growing very strongly quarter to quarter. This healthy consumption trend appears a long-term theme to me and companies which are expanding product categories would gain. Also, in times like this, more money could be flowing towards the defensive names.
What would you tilt towards — HUL, ITC or a Tata Consumer?
It is Tata Consumer and Marico in that order. ITC continues to remain an enigma. The big trigger would be if they decide to demerge their FMCG business and may be spin off the hotel business and the tobacco business or if there is residual stake sale by the government.
While it was a dream run for in 2020 with those cheques coming in for the Jio and the retail platforms, what will be the next trigger for Reliance?
The oil to chemical monetisation and possible demerger listing to me would be the trigger. If you see the EBITDA contribution still of oil to chemicals is close to 60%. Their conversion rate of oil to chemical is about 24% which is likely to go up. The new energy outlook talks about petrochemicals being the biggest consumer or driver of oil consumption like the transportation sector for the last decade. Reliance has the advantage of the feedstock flexibility. We are likely to see some more action once we see some tariff hikes and which could rerate the entire Jio platform. But the near-term trigger would be monetisation of the oil to chemicals.
What are you expecting when it comes to Maruti?
The stock has been a bit of an underperformer and the primary reason has been that they are losing market share in the SUV segment to Hyundai, Kia Motors and even Tata with the new launches. But at this price point,there is some amount of margin of safety and the best bet in auto space right now is to play this farm equipment and tractor makers.
Escorts looks very good. This is one set where we will have good growth. There has been record procurement by the government, there is a keenness to double farm income. There is investment happening in the rural infrastructure segment. The material handling segment where they have about 55% market share is also doing well. Tractors will see double digit volume growth for the next couple of years and even the railway order book seems to be pretty healthy. There is macro support in all three segments of the business. Farm equipment makers are a better bet. Also consider M&M because of cheap valuations as well as the revised capital allocation strategy.
How are you looking at the entire infrastructure basket? How is overall trade getting impacted due to the second Covid wave and the fresh restrictions, migrant workers returning home etc?
There is an impact. Some of it is reflecting even in the bellwether stocks like L&T, both in terms of execution as well as labour migration. It would be temporary and if you get a deeper correction L&T can be a buy.
Also, the commodities cycle is possibly midway. We are seeing both operating and financial leverage play out. In steel, we have seen three to four hikes including the one which has recently happened. Tata Steel, for example, in particular has seen almost Rs 18,000 crore of debt reduction. They are trying to streamline their European operations. The EBITDA per ton would be much better than the last time.
Hindalco, one of the best metal companies in nonferrous space, both the India aluminium business as well as Novalis, are doing well. The new capital allocation policy is expected to generate more than a billion dollar free cash flows 50% of which will go towards debt reduction and operating capex and the balance towards dividend payout. So, there’s a clear strategy there. They have a targeted EV/EBITDA in terms of how to reduce debt further.
Where do you stand on recovery in commercial vehicles (CV) space? It has suddenly come to a halt because of the fresh spike in cases and mini lockdowns across the country. Is CVs a good space to buy on dips or should one stick with the rural dominated themes?
We should mainly play the farm equipment players and tractor makers including Escorts and M&M. There are also some good players like Minda which is more into value per car, more content per car other than the switches and lightings where they are adding more clients. Their sensor plant is getting operationalised and they are getting into airbags, infotainment systems, car seats.
In CVs, if you get some good bargain price below Rs 100 for an
, it could be a buy. Eventually economic recovery will happen and also CV valuations are not prohibitively expensive. So buy on dips would be a better strategy as far as CVs are concerned. But one has to be long-term oriented and not just try and play the momentum.
